Subdivision of shares: Share splits and how to use a Subdivision Resolution

In this post, we’ll explain why, when and how to use a Subdivision Resolution when you do a share split – typically you’ll do this to increase the number of shares available to give to investors before a funding round.

Contents

• What is a Subdivision Resolution?
• Why and when do you need to split shares?
• How to do a share split

What is a Subdivision Resolution?

A subdivision resolution is a document that needs to be signed by all shareholders as part of a share split.

You can create, sign and download a Subdivision Resolution and SH02 form on SeedLegals – try us free for 7 days.

‍

‍‍

Why and when do you need to split shares?

When someone incorporates their company on Companies House, they usually create 1 share per founder, or perhaps 100 shares split between founders.

That’s fine… until the company wants to raise funding. Then they’ll need to do a share split, here’s why:

• Let’s say you’re raising £200K and giving away 15% equity in your company for that investment.
• Assuming you had 100 shares originally, that means you’re going to create 17.6 new shares in the funding round, which equates to 15% post-money equity dilution.

You can see immediately that there are two problems:

• Firstly, you can’t have fractional shares, so you won’t be able to get the exact investment and equity dilution that you want, and
• Secondly, if you’re raising £200K and create 17 new shares, that a price per share of £11,764… which is a huge problem for anyone looking to invest, say, £5000. Even for someone looking to invest £50,000, they’d be thousands of pounds off their target.

The solution is a share split (or, as Americans would call it, a stock split), where you turn those 100 shares into, for example, 100,000 shares. At the same time, you reduce the nominal value of each share by the same ratio, so that the total value of your shares is unchanged.

How to do a share split

The good news is that SeedLegals automates the whole process. Assuming you’ve built your cap table on SeedLegals already, it’ll take just a few minutes to do everything – here’s how:

1. Select Shares in the left menu.

2. On the top banner, click the right arrow to go to the Share splits tab:

3. Click to create a New Share Split

4. Choose the multiplier you’d like – e.g 1000:1, and set a date for the share split.

5. SeedLegals instantly builds your Resolution documents and SH02 form.

• Board Resolution – this only needs to be signed by one board member.
• Subdivision Resolution– this must be signed by 50% (by number of shares held) of the existing investors. In most cases that just means getting a couple of the founders to sign. You don’t need to file this with Companies House, just keep it for your records.
• SH02 – this form needs to be signed by any director, easy.

6. Upload the SH02 to the Companies House website.
Or you can download and print the SH02 and post the signed form to Companies House. They must receive it within 30 days of the share split. The address is:

Registrar of Companies (England and Wales)
Companies House
Crown Way
Cardiff
CF14 3UZ
DX 33050 Cardiff

7. Lastly, and very importantly, click the button to Approve share split button. This will update your cap table to increase the number of shares and reduce the nominal value of each share accordingly.

We recommend having at least 100,000 shares before you do a funding round. For example, if you have 100 shares now, we recommend a 1000:1 share split. Or to future-proof your shares so you don’t have to do another share split for a future funding event, you might want to create, say, one million shares.

Make sure you pick a multiplier that creates a share nominal value that can be fully represented in 8 characters after the decimal point – the maximum allowed by Companies House. For example, if the nominal value is £1, doing a 300:1 share split is a bad idea because it will create a new nominal value of £0.003333333333…. which means the total nominal value of all the shares after the share split can never exactly match the amount before. So ideally go with 10, 100, 1000, etc. as the multiplier for the share split.

Talk to an expert

Got questions about share splits? Not sure how best to prepare for your funding round? Book a free call with one of our experts to get answers fast.